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���������ֳ� - Hong Kong - 09 Apr 2020: ���������ֳ� has revised the Outlook on Benin's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Positive and affirmed the rating at 'B'.

Key Rating Drivers

The Outlook revision reflects ���������ֳ�'s expectation that the significant economic and fiscal impact of the global coronavirus pandemic will compound the shock stemming from the continued border closure with Nigeria. The heightened macroeconomic and fiscal risks associated with these shocks offset Benin's improvements of public and external finance metrics resulting from a track-record of fiscal consolidation since 2016 and the rebasing of GDP statistics published in 2019.

The timing of the border re-opening with Nigeria remains uncertain. Nigeria shut its land border with Benin, as well as with other neighbouring countries, in August 2019 in a bid to curb informal imports. An indication of its severity is given by the fact that formal imports, 40% of which are informally re-exported to Nigeria, dropped 31% yoy in 4Q19, according to official data. Discussions between both countries are on-going but current measures to contain the spread of the coronavirus have led to tighter controls on the 800km long border, although it remains porous, and have delayed a resolution. Assuming a prolonged border closure until end-2020, we project a 40% contraction of informal trade in 2020. However, there is significant uncertainty regarding the potential magnitude of the contraction, as it depends on the duration and severity of the border closure.

We expect growth to decelerate sharply to 1.8% GDP in 2020 from 6.4% in 2019, remaining above the forecast 'B' median of -0.2% in 2020. This is attributable to weak domestic demand and performance in the construction sector as well as our expectation of lower cotton production in the context of sluggish global trade and lower international cotton prices. Recession in Nigeria in 2020 (-1% GDP growth under our baseline scenario) will also have adverse effects on Benin's growth beyond the border closure given reliance on Nigerian demand. While there is no lockdown in Benin, limiting local disruptions to economic activity, the border restrictions as well as the coronavirus containment measures will nonetheless affect commerce and the transport sector.

We currently project GDP to bounce back by 6% in 2021, at higher levels than the forecast 'B' median of 3.9% in 2021, assuming a normalisation of the border closure with Nigeria, a recovery in global demand and a stabilisation of the coronavirus-related shock domestically. However, risks are tilted to the downside given uncertainty regarding global economic conditions and the spread of the pandemic.

We project the fiscal deficit to widen to 4.4% of GDP in 2020 from 2.3% in 2019, in line with the forecast 'B' median of 4.6% in 2020. We expect government trade revenues, which account for around 33% of revenues in 2019, and tax receipts, to fall significantly. We also anticipate an increase in official fuel imports in substitution of informal imports of subsidised fuel from Nigeria (~80% of domestic oil consumption) given the border closure and lower global oil prices, which ���������ֳ� projects to average USD35/barrel after USD64.1/barrel in 2019. This will allow for a moderate increase in trade taxes on fuel imports as well as revenue gains from the differential between administrated and international fuel prices. ���������ֳ� assumes cuts to current expenditure, as reflected, for example, by the government's recent decision to reduce diplomatic representation abroad, and to capital expenditures will be largely offset by higher health spending and to support to sectors affected by the border and coronavirus-related shocks.

Benin has developed a track-record of fiscal consolidation and progress in structural reform. Performance under the current IMF programme (which will expire mid-2020) has been very satisfactory and the authorities have proven commitment to fiscal discipline, which somewhat mitigates the rising fiscal risks.

We expect the government will cover its funding needs in 2020 from a mix a domestic financing and official creditors support. The latter would likely include the emergency assistance from the IMF (USD85 million; around 0.6% of GDP), the likely renewal of its IMF programme, with a potential upsize, as well as other multilateral financing, to address rising financing needs stemming from the coronavirus-related shock. The regional central bank has eased liquidity conditions and ���������ֳ� expects the government will be able to finance itself with relative comfort on the domestic market.

Benin's 'B' IDRs also reflect the following key rating drivers:

We project general government debt to increase to 44.3% of GDP in 2020 from 41% in 2019, due to higher deficits and a contraction in nominal GDP, which compares favourably with the forecast 'B' median of 51% in 2020. Contingent liability risks are small as state-owned enterprise debt represents only 1% of GDP and the government has not yet signed public-private partnerships under the 2016-2021 Government Action Programme.

The government has no foreign marketable debt maturing before 2024 when principal amortisation of its Eurobond begins while annual interest on the Eurobond (USD32 million) represents only 0.2% of GDP in 2020. A potential waiver on interest payments to multilateral and bilateral creditors would only slightly alleviate funding needs, as they represent around 0.3% of GDP in 2020. Benin's track-record of proactive debt management has given priority to obtaining concessional financing, which has reduced refinancing risks and contained debt costs.

We project the current account deficit to widen moderately to 4.7% of GDP in 2020 from around 4.3% of GDP in 2019, basing our estimations and projections on official current account data. The latter incorporate informal export data but may understate informal imports, and ���������ֳ� estimates the deficit could reach up to 6.2% in 2020 from 5.2% of GDP in 2019, fully incorporating informal imports. Exports will contract sharply given lower informal re-exports and a fall in cotton export receipts (15% of total exports) due to dampened global demand and lower cotton prices. Imports will likely drop materially almost in tandem with the reduction of exports given a proportional fall in official imports re-exported to Nigeria, sluggish domestic demand and lower oil prices.

Benin's external finances remain weaker than peers but membership of the West African Economic and Monetary Union (WAEMU) underpins macroeconomic stability and reduces foreign exchange liquidity risks. Benin's sizeable current account deficits, which the agency forecasts to range between 4.4% and 5.7% on average over 2020-2021, at similar levels than the 'B' median average of 4.9% over 2020-2021. However, WAEMU membership gives Benin access to the pooled reserves of the eight member states, estimated at USD15.8 billion end-November 2019. In a case of stress, the regional central bank could also access the convertibility guarantee of the French Treasury from West African CFA franc/ECO to the euro if the stock of international reserves was depleted, limiting risks of devaluation of the peg to the euro.

Benin's banking sector asset quality and solvency is weaker than 'B' category peers and will likely deteriorate further. Gross non-performing-loans levels are high, representing 20.4% of total loans at end-2018, and are likely to increase owing to broader reverberations of the coronavirus-related and border closure shocks on domestic revenues. Risks for the sovereign from the banking sector are mitigated by its moderate size (42% of GDP) and the high share of foreign-owned banks.

ESG - Governance: Benin has an ESG Relevance Score of '5' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) has in our proprietary Sovereign Rating Model. Benin has a medium WBGI ranking at the 39.9th percentile, reflecting a history of peaceful transfers of power through elections since the advent of democracy in 1991. Benin witnessed episodes of social unrest following the April 2019 parliamentary elections, but public demonstrations have since subsided.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

���������ֳ�'s proprietary SRM assigns Benin a score equivalent to a rating of 'B+' on the Long-Term Foreign-Currency (LT FC) IDR scale.

���������ֳ�'s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:

- External Finances: -1 notch to reflect the vulnerability to external shocks including significant exposure to the Nigerian economy and international trade. The closure of the Nigerian border represents a potentially sizeable external shock, with adverse implications for Benin's economy and public finances, depending on the effectiveness of the closure, how long it remains in place and Benin's resilience to the developments.

���������ֳ�'s SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ���������ֳ�'s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES

The main factors that may, individually or collectively, lead to positive rating action/upgrade are:

- Greater confidence in the resilience of Benin's growth prospects to the shocks stemming from the border closure with Nigeria and the global impact of the coronavirus pandemic.

- Evidence of sustained fiscal consolidation putting debt/GDP on a declining trajectory in the medium term, for example through a structural improvement of public finances.

- Reduction in external vulnerabilities, for example through sustained lower current account deficits or external indebtedness.

The main factors that may, individually or collectively, lead to a negative rating action/downgrade are:

- Failure to stabilise debt/GDP in the medium-term, for example due to increasing fiscal deficits or low GDP growth.

- Weaker medium-term growth prospects than our current baseline, due to a longer or larger than expected impact of the border closure with Nigeria or coronavirus pandemic on economic activity.

- Heightened external vulnerability, for example due to rising current account deficits or external indebtedness.

Best/Worst Case Rating Scenario

Ratings of Public Finance issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings /site/re/10111579.

Key Assumptions

���������ֳ� expects macroeconomic indicators to move in line with ���������ֳ�'s Global Economic Outlook forecasts, but acknowledges that these are likely to be subject to frequent and possibly significant downward revisions given the evolving nature of the global crisis.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Benin has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ���������ֳ�'s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.

Benin has an ESG Relevance Score of 5 for Rule of Law, Institutional and Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in the SRM and are therefore highly relevant to the rating and a key rating driver with a high weigh.

Benin has an ESG Relevance Score of 4 for International Relations and Trade as dependence on trade to Nigeria is relevant to the rating and is a rating driver.

Benin has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver, as for all sovereigns.

Benin has an ESG Relevance Score of '4' for Human Rights and Political Freedoms, as the Voice and Accountability pillar of the World Bank Governance Indicators are relevant to the rating and a rating driver.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on ���������ֳ�'s ESG Relevance Scores, visit .

Additional information is available on

Applicable Models

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Country Ceiling Model, v1.7.1 (1)
• Debt Dynamics Model, v1.2.0 (1)
• Macro-Prudential Indicator Model, v1.4.0 (1)
• Sovereign Rating Model, v3.11.0 (1)

Additional Disclosures

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Endorsement Status